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Three letters, AMT, are striking tax
fear in the hearts of more and more middle-class filers.
These folks are simply trying to use the
tax code, legally, to lower their annual Internal Revenue
Service bills. They claim exemptions for eligible dependents,
deduct the interest on their mortgage and associated
equity loan, and write off the state income taxes they
pay. Some of these tax breaks, however, will do them
no good under the alternative minimum tax system.
Commonly referred to as the AMT, this
tax has its own set of rates (26 percent and 28 percent)
and requires a separate computation that could substantially
boost your tax bill. Basically, it's the difference
between your regular tax bill, figured using ordinary
income tax rates, and your AMT bill, figured by
filling out more IRS paperwork. When there's a difference,
you must pay that amount, the AMT, in addition to your
regular tax.
The AMT was designed in 1969 to ensure
that wealthy taxpayers didn't use loopholes to escape
paying their fair share of taxes. The original target
was 155 filers with the then-exorbitant income of $200,000
who avoided paying any federal taxes.
More AMT victims,
higher taxes
Nowadays, according to the Treasury Department, when
an AMT payment is required, the federal coffers get,
on average, an additional $2,770 per household.
Government number crunchers point to other
alarming figures. Four million people paid AMT in 2005
and, without changes to the system, the AMT will ensnare
almost 22 million taxpayers this year and 52 million
by 2015.
Why the increase? Because the tax is not
indexed for inflation. Without that annual adjustment,
your yearly raises of a few percentage points have been
moving you closer or even into the income realm that
the tax law deemed 35-plus years ago as prime AMT bait.
A short-term ATM fix is pending in Congress.
The IRS's own Taxpayer
Advocate says the system should be scrapped; the
President's Advisory Panel on Tax Reform agrees.
While lawmakers and economists wrangle
over whether and how to tweak the AMT, taxpayers are
left to deal with it. Here's what to look for, as well
as look out for, when it comes to this potential added
tax burden.
Calculation insult
to tax injury
Adding insult to injury, the AMT's parallel system demands
that taxpayers do more work to pay more in taxes. The
effort is required both in filing paperwork (the two-page,
55-line own Form 6251, Alternative Minimum Tax -- Individuals)
and maintenance of separate records for regular and
alternative tax purposes.
Even filers who escape actual payment
of the higher tax still must do additional work just
to learn that they are off the AMT hook.
To help sort through the AMT mess, some
taxpayers turn to computer software packages, most of
which include AMT computation, or hire professional
help. Both choices should help you stay on the IRS's
good side, especially if you owe AMT, or at least put
your mind to rest if you don't.
But the options also will add to the overall
cost of doing, if not paying, your taxes.
Free
help in figuring your AMT
This year, however, the IRS is providing some free AMT
calculation assistance.
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